In most circumstances a first time bankrupt will be eligible for discharge after nine months. How long your bankruptcy will last can be extended if you have been bankrupt before or you are required to pay surplus income.
The length of bankruptcy in Ontario is as follows:
A first time bankrupt with no surplus will be bankrupt for 9 months (unless opposed)
A first time bankrupt with surplus will be bankrupt for 21 months (unless opposed)
A second time bankrupt with no surplus will get an automatic bankruptcy discharge after 24 months (unless opposed)
A second time bankrupt with surplus will get an automatic discharge after 36 months (unless opposed)
If this is your third bankruptcy, you are not eligible for an automatic discharge. Your bankruptcy trustee will need to apply to the bankruptcy court for an application for discharge hearing.
The above timelines are based on your discharge not being opposed by your creditors, the trustee or the Office of the Superintendent of Bankruptcy. This is rare but can happen.
How Does Surplus Income Affect Length of Personal Bankruptcy?
Surplus income is one potential cost of bankruptcy. The federal government has set net monthly income thresholds for a person to maintain a reasonable standard of living. This threshold is then used to determine how much you must pay if you file for bankruptcy.
For example, (using 2018 guidelines) if you have a family size of 3 people, your net income threshold would be $3,293. If you have a net income of more than $200 over the government allowed income threshold, the length of your bankruptcy will be extended for a further 12 months. You’ll also be required to continue to pay that surplus income into your bankruptcy estate for your creditors.
A longer bankruptcy means extra payments, which increases the cost of bankruptcy. You can use our free Surplus Income Calculator to help you determine what your potential surplus income payments might be.
What Other Factors Impact Bankruptcy Length?
Bankruptcy Duties
The length of time before a bankruptcy discharge also depends on whether you have completed your duties under bankruptcy law. Some of the most important duties include:
Disclose all property (assets) in your possession and delivering non-exempt assets to the Licensed Insolvency Trustee
Surrender all credit cards to the Trustee for cancellation
Report your household income and monthly expenses to your Trustee
Make all of your required payments, which include surplus income
Attend two mandatory credit counselling sessions
You can find a complete list of duties here. Failure to complete them will increase how long you will be bankrupt. If you have any problems in completing your duties, you should speak to your Trustee for advice as soon as possible.
Discharge Opposition
While this is rare, if one of your creditors opposes your bankruptcy discharge, a court hearing will be held. It will then be up to the court to decide whether you will be discharged. If you face this process, it would extend the length of your bankruptcy.
But, as mentioned earlier, if it’s your third bankruptcy, you’re required to go to court to be discharged.
Consider Bankruptcy Alternatives
Talk to us if you think you might have to pay surplus income and additional bankruptcy payments over a longer period of time. An option may be to avoid bankruptcy by filing a consumer proposal, which for many people is the best solution.
Since this is a complicated area of bankruptcy law, please contact our bankruptcy trustee offices to schedule a free initial consultation. We will review your income, and explain how surplus income will be calculated in your situation, which will allow you to estimate the cost and length of your bankruptcy.
At Hoyes, Michalos and Associates we are proud to be a team of understanding professionals who are experts in bankruptcy, consumer proposals and all Ontario debt management options. Contact us today to book a free consultation with a Licensed Insolvency Trustee.
Student loans receive special treatment under the Bankruptcy and Insolvency Act in Canada.
Most student loans are government guaranteed which means that the bank that provided the funding is protected in the event the loan goes into default.
In order to protect the government from a run on unpaid student loans, rules were added to Canadian bankruptcy law that state a student loan will not be covered or extinguished after bankruptcy or a consumer proposal if it has been less than 7 years from the last study date.
After this 7 year ‘waiting period’, if you haven’t been able to repay your student loans, personal bankruptcy or filing a consumer proposal can be a good option to obtain relief from your student loans.
Overwhelming student loan debt is a growing financial crisis. In Canada, student debt can be forgiven through the Bankruptcy and Insolvency Act, but there are some special rules. I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes Michalos & Associates. Today I’m going to explain the 7-year rule for student loan debt in a bankruptcy or consumer proposal. When you borrowed money to attend school, you most likely applied for a loan through a government program like Canada student loans or a provincial program like OSAP here in Ontario. Government student loans can be forgiven in a bankruptcy or consumer proposal in Canada, but you must be past the legal waiting period, that waiting period is 7 years. Specifically, section 178 sub J of the Bankruptcy and Insolvency Act says that government guaranteed student loans will only be automatically discharged in a bankruptcy if it has been more than 7 years since you ceased to be a student. But what does cease to be a student mean? When does the clock start? When you got the loan doesn’t matter, the important date is when you cease to be a student, which is often the end of the month when you had your last exam or when you graduated or otherwise left school. If you went back to school after you graduated, that may reset the clock, or not, the rules are somewhat complicated in this area. If you are considering filing for bankruptcy or consumer proposal and have student debt, it’s important that you confirm your official end of study date for government student loan debt. We’ll explain how to do that when you come in for your initial consultation, but basically it involves contacting both the federal and provincial student loan lenders and asking them to send you a letter confirming your end of study date. It’s critical that you know what end of study date the government has in their system before you decide whether or not to file a bankruptcy or consumer proposal. Now, you may have noticed that up until this point I’ve been talking about government guaranteed student loans, many students take out additional private loans when going to school. This is very common in some professional programs. You may have an unsecured loan or line of credit from a bank or credit union, you may have gotten a credit card while you were still a student and still carry a balance. There is no waiting period to discharge private student debt in a bankruptcy or proposal. These debts are forgiven just like any other unsecured debt. Rules around bankruptcy and student debt can be complicated, if you have student debt talk to your Licensed Insolvency Trustee about the 7-year rule and any other concerns so you know exactly how your student loans will be treated before filing. You can also visit hoyes.com and look up student debt and bankruptcy for more information.
If you are considering filing a bankruptcy or consumer proposal and have student debt, it is important that you confirm your official ‘end of study date’. This date doesn’t mean the last day you attended school. It is the date that the government considers to be the last date of the program you were last enrolled in. It also includes both full-time and part time attendance.
You can verify your end of study date by calling 1-888-815-4514 for Canada Student Loans or 1-807-343-7260 for Ontario Student Loans.
The rules around bankruptcy and student debt relief can be quite complicated, so it is important to talk through this 7-year rule with your Licensed Insolvency Trustee before filing.
Here is one example about what happens if you get the dates wrong:
Last Date of Study: Actual Case File
A few years ago, we met with Frank (not his real name) in our Vaughan bankruptcy office. He had enrolled in a human resources course at Humber College. To pay for the costs of his books and tuition, like many, he took out a student loan. For a variety of reasons, Frank eventually decided to quit in his final year. That was about 7 years ago.
After leaving Humber, Frank was unable to find steady employment, and unfortunately started to rely on credit cards to help cover his ongoing living expenses. Now married with a young child, Frank was finding it increasingly difficult to keep up with his student loan payments and his credit card payments and realized that he was in trouble. He came in to see us for a free consultation and we reviewed with Frank what his options were given his current financial situation. He decided to proceed with the filing of a bankruptcy. We explained to Frank about the special treatment of student loans and he was sure that it was more than seven years ago that he was at Humber, so he was certain that the bankruptcy would allow him to get rid of all his debts including his student loans. Frank filed for bankruptcy, and after nine months he received his discharge.
About six months after his discharge, Frank called us up and said that he was getting calls from the government wanting him to start making the payments on his student loans. They were even threatening to take legal action. While Frank was confident that he left school more than seven years ago from the date of his bankruptcy filing, the government was saying that while he may have left Humber more than seven years ago, they were relying upon the completion date of the courses that he was enrolled in rather than when he left Humber. As it turned out, the government was correct, and Frank was still liable for his student loans.
The message to learn here is to never proceed with any formal insolvency proceedings without first verifying the exact last date of study according to the government records.
While Frank was disappointed, we suggested that he see if he can apply to bankruptcy court to have his student loan included in his initial bankruptcy filing. Frank had been conscientiously paying his student loans for many years and without completing his education, he just could not find a job earning enough money to support his new family. Fortunately for Frank, the bankruptcy judge sympathized with Frank’s personal situation and agreed to order that his student loans be covered in his bankruptcy.
Frank was lucky that this did resolve to his benefit. However, always confirm your last date of study not only with your trustee, but with your student loan records.
If you need help with student debt, contact a Licensed Insolvency Trustee today for a free no-obligation consultation where we will look at all your debts with you and help you decide if a bankruptcy or consumer proposal makes sense to deal with your student debt.
On today’s show, I discuss the news that data from Equifax was “hacked”. It appears that “only” 100,000 Canadians were impacted, but even if your data was not impacted by this event, it’s a good wake-up call for all of us:
Your data is vulnerable.
How to Survive the Equifax Hack
So how can you protect yourself? Here is my 8 point plan:
Review your credit card and other transactions at least once per week;
Cancel any credit you no longer required;
Keep your credit limits low;
Get electronic copies of all statements, not paper copies;
Never share your PIN;
Only provide your Social Insurance Number where required by law;
Consider placing an alert or freeze on your credit report requesting that lenders verify your identity or receive permission to access your credit report
If you have ever applied for credit, you have a credit file, even if you have paid off all of your debts. That means your data is vulnerable, so it’s up to you to keep an eye on your data. At a minimum, review all of your credit card, bank and loan statements regularly; don’t wait until the end of the month. I check my statements online every few days. If you see a problem, report it immediately.
Full details are in today’s transcript shown below.
FULL TRANSCRIPT show #161 Debt Should Come With a Health & Safety Warning
Today I want to talk about a story that’s been in the news for the last month or so: the Equifax data hack.
As I’m sure you’ve heard, some computer hackers were able to get access to a lot of the data that Equifax keeps on consumers, including their names, addresses, and social insurance numbers.
According to a statement issued by Equifax released on September 19, in addition to the 140 million Americans impacted, the incident involves potential access to the personal information of approximately 100,000 Canadian consumers
It appears that most of the data relates to Americans, so unless you have an American credit card or other dealings in the U.S., your data may not have been stolen.
Or it may have; we don’t know for sure; Equifax has not exactly been transparent and forthcoming when it comes to telling us what’s really happened. Apparently they are sending a letter to all Canadians who were impacted, so presumably if you haven’t received a letter by now, you may not be impacted.
Even if you weren’t harmed by this incident, a lot of your data is “in the cloud”, so what can you do to protect yourself from future hacks, and what do I think the government should do to help protect us?
I’ve got a few thoughts on this subject.
First, wouldn’t it be great if debt came with a Health and Safety Warning?
You know when you buy any kind of over the counter medication, there’s all that fine print that tells you all of the side affects you might get if you take those pills?
The law says you can’t sell anything that might be dangerous unless it comes with a health and safety warning. Makes sense.
On every show here on Debt Free in 30 I talk about the dangers of debt, so why doesn’t debt come with a health and safety warning?
Maybe it should.
Did you realize that when you signed up for your credit card that the credit card company would be giving all of your data to Equifax?
They do. That’s how the credit reporting agencies work. There are two big ones in Canada, Equifax and TransUnion, and they get your personal data from the big banks and credit card companies when you borrow money.
This isn’t illegal. In fact, if you go back and look at the agreement you signed when you applied for that credit card or bank loan there was a bunch of fine print that said: “we will be sharing all of this data with the credit bureaus”.
Before this big data hack, no-one thought much about that, but now that we are thinking about it, wouldn’t it be nice if there was a big health and safety warning, in big print, on every loan application you signed?
I’d like to see big bold letters that say whatever you tell us may not be kept private.
I wonder if a warning like that would change our behavior?
Does the health and safety warning on a pack of cigarettes make you less likely to smoke? I assume it must be a good warning for some people, or it wouldn’t be there.
Since I don’t expect the government to create a health and safety warning on credit applications anytime soon, let’s talk about what you can do to protect yourself from credit bureau data hacks.
Let me start by telling you the most important point that you may not fully realize:
You are not a customer of Equifax. You are the product.
Let me say that again: You may think that because you can order a copy of your credit report from Equifax, Equifax is working for you.
Nope.
You, and your data, is the product that Equifax is selling to the big banks, and credit card companies, and any other company that wants to lend you money.
You are the product.
Equifax and TransUnion generate most of their profit from selling your data to the big lenders. It’s true, they do make a few bucks by selling consumers their credit score, but the big money is from their big customers, and that’s why their priority is servicing their big customers, not helping you.
Probably the biggest complaint I get from clients is that, after they finish their bankruptcy or consumer proposal, they check their credit report and some of the information is wrong.
There is one big bank that regularly reports a consumer proposal as a bankruptcy, so when you read your credit report it shows the bank’s name, and your debt, and then it says “included in bankruptcy”, even though you never filed a bankruptcy; you filed a consumer proposal.
This is extremely frustrating, and when we talk to that bank they say “oh, sorry, that’s just how our system does it”, and when we talk to the credit bureaus they say “we just report the information we are given, so if that’s what the bank tells us, that’s what we report”.
Why isn’t the credit bureau more responsive to customer needs?
Because you aren’t the customer. You are the product.
Once you understand that you are the product being sold, you now have more incentive to protect yourself.
The obvious answer is to say “okay, I don’t want my information to be sold, so I’m going to cancel all of my credit cards and pay off all my loans and never have any credit again”.
That would save you a lot in interest, but unfortunately even if you paid off all of your debt and never applied for credit again, you would still have information on your credit report. Your name and birth date and social insurance number are still on your credit report, even if you stop borrowing money.
That’s the problem: once your information is “in the cloud”, it stays there for a very long time.
So if paying back all of your loans and never applying for credit again isn’t a fool-proof option, what can you do to protect yourself?
Here’s my eight point plan:
First, and most importantly, check your credit card and loan activity regularly. Personally, I go online and check my credit card statement every two days. That’s right, I don’t wait for my statement at the end of the month. Every day or two I go online and do a quick review of transactions and confirm that they are all legit.
Guess what: earlier this month, while I was reviewing my transactions, I found three charges for three taxi trips I had taken the day before in Toronto.
Unfortunately I was not in Toronto the day before, and I had not been in a taxi in a long time.
I also saw that apparently when I was not in Toronto I managed to have two meals at a restaurant in Toronto.
I immediately called the credit card company, and they immediately cancelled my credit card. They told me that my credit card number had been manually entered, meaning they knew no-one had my credit card, with the chip, and the PIN number. That’s why they believed me that it wasn’t me.
It took two days for them to send me a new card, and they reversed the fraudulent transactions, so it didn’t cost me anything.
In my case the total was around $300, so it wasn’t a big deal for the credit card company, but if I had waited a month to find the problem, it would have been a lot more money, and perhaps the credit card company would not have been so eager to help me out.
Point #1 – go online and check your transactions regularly.
Advice point #2: cancel any credit you don’t need. If you no longer use that old department store credit card, or gas company credit card, or credit card from that bank you no longer deal with, cancel it. If the card is cancelled, there is no way anyone can use it.
Personally, I believe that in a perfect world the ideal number of credit cards is zero, but since it’s difficult to book a hotel room or rent a car without one, my advice is to have at most two credit cards. Have one main one that you use for everything, and that’s the one you get your points or travel miles or rewards on, and have a second one as a back up, from a different lender. That way if your card is compromised, you have a back up card you can use while waiting for the new one to arrive.
Point #3 – keep your credit limits as low as possible. Just because the bank says you qualify for a $10,000 credit limit doesn’t mean you should accept the limit they suggest. If the most you ever spend is $2,000 in a month, like when you have to book plane tickets and a hotel for your vacation, get a card with a $3,000 or $5,000 limit. The lower the limit, the less risk for you.
Point #4 – where possible, get electronic copies of your statements, not paper copies in the mail. How hard would it be for someone to steal your mail? If they can, they now know your name, address, and credit card number. That’s not good.
Point #5 – this is obvious, but never share your PIN. That way, even if your card is stolen, it can’t be used at a chip reader machine.
But what do you do if you want to share your credit card with someone, like your spouse, or your child? Either get them a secondary card on your account, with a different card number, or apply for a new card that they can use, but with a small limit. So if your kid is going off to university and they need emergency access to credit, get them a card with a $500 limit, to minimize your risk.
Point #6 – only provide your social insurance number where required by law.
This is a big one. Your Social Insurance Number is a unique identifier for the federal government. They use it when you pay your taxes, or get unemployment insurance, or for your government pension or other government services.
The key point is that it is for use by the federal government, and no-one else.
So, when you open a savings account at the bank, the bank needs your social insurance number, because they have to report the interest you earn every year, so you can pay taxes on it. Makes sense.
So tell me this: when I buy a cellphone, why does the application form request my social insurance number?
What does a cellphone have to do with my taxes?
The answer, of course, is nothing, but the cellphone company wants it so when they do a credit check on you they are more likely to match you up correctly with your credit report.
Don’t give it to them. They don’t need it, and it’s not even lawful for them to ask for it.
The more people who know your social insurance number, the more likely it is that one of them will use that number to apply for credit in your name, so don’t give it out, unless it’s required by law.
Now those of you who are astute listeners will be saying “that’s all good advice, but checking my transactions on-line every few days won’t tell me if someone has stolen my identity and set up new credit in my name”.
That’s true; you don’t know to check your transactions on a card you don’t know exists.
So what can you do?
The obvious answer, and this is:
Point #7 – is that you should regularly get a copy of your credit report, and review it to see if there are any debts you don’t know about. Of course this a bit of a pain, because you have to go online, or phone, or fill out a form and mail it in, but it’s the only way to see what’s on your credit report.
The laws are different in each province, but for those of you who are listening to this podcast in Ontario, we have a law called the Consumer Reporting Act, and section 12 says that
Right of consumer to disclosure
(1) Every consumer reporting agency shall, at the written request of a consumer and during normal business hours, clearly and accurately disclose to the consumer, without charge,
(a) the nature and substance of all information in its files pertaining to the consumer at the time of the request;
(b) the sources of credit information;
(c) the name and, at the option of the consumer reporting agency, either the address or telephone number of every person on whose behalf the file has been accessed within the three-year period preceding the request;
…..
and shall inform the consumer of his or her right to protest any information contained in the file under sections 13 and 14 and the manner in which a protest may be made
The key point here is that, according to the law, there is no limit on how many times you can request a credit report, for free. I haven’t tried to get a credit report each month, but this may be a strategy to stay on top of your credit history.
We did call the Ministry of Government Services here in Ontario and they told us that you can only have your credit report for free once a year.
But we said, wait a minute, section 12 doesn’t say anything about once a year. The government employee said “well, I don’t know the specifics of that section, but I’ve attended a number of meetings where it has been discussed, and it was definitely limited to once a year.”
So, I don’t know who to believe: the written law, or the government employee that interprets the law.
I’d be interested to hear from listeners if you are denied a credit report if you request it more than once a year.
And yes, I realize that there are two main credit bureaus in Canada, so you could get your credit report from Equifax today, and then in six months get it from TransUnion, and then in another six months get it from Equifax again, so that way you are getting a credit report every six months, but that still means it’s six months before you realize there is a problem.
Point #8: There is another strategy you can use to protect yourself. Section 12.1 of the Act says that:
Alert to verify identity of consumer
12.1 (1) A consumer may require a consumer reporting agency to include, in the consumer’s file, an alert warning persons to verify the identity of any person purporting to be the consumer.
So, you could put an alert on your credit file requiring all lenders to verify your identity before giving you a loan.
How practical is this? I don’t know.
If you are planning to get a mortgage or car loan or new credit card in the near future, requiring the lender to verify your identity may slow down the credit granting process, so it may hurt you. I don’t know.
However, if you aren’t planning to borrow any money in the near future, this may be an extra level of protection for you.
Now of course there is a third option to protect yourself, but I’m reluctant to recommend it.
You can subscribe for alerts from Equifax.
Here’s the catch: the very people who exposed the data of 140 million Americans to hackers now wants to charge you $20 a month to tell you if there is any suspicious activity on your account.
What a great business? Put your information out there, and then charge you money to tell you if any of your information is out there!
Here’s the deal:
It costs $19.95 per month, and for that fee Equifax will give you alerts of any key changes to your Equifax credit file, and it gives you daily access to your credit score and credit report.
So is it worth paying $240 per year to find out if there are issues on your credit report?
I don’t know. That’s a question that only you can answer, but it certainly upsets me that I have to pay money to access my data.
Remember, you and I are the product, not the customer, so I’m not happy that I have to pay to see my data.
Think about it:
When you go to the gas station to buy gas, does the gas station charge you money to tell you if there is any gas in their tanks?
Of course not. Gas is the product; you pay to buy it; you don’t pay to find out if it’s there.
If my data is the product, why should I have to pay to see which of my data they have?
So those are my eight suggestions for how you can protect yourself.
Now let me tell you what I think the government should do.
Regular listeners to this podcast will know that I’m not a big fan of government rules and regulations. I find that they tend to just mess things up, rather than make things better.
However, in this case, I sign one form to apply for one credit card, and for the rest of my life all of my personal data is out there in the world for all to see, and there is nothing I can do to get it back. Even if I pay all of my debts, my information is still in the big computer in the sky.
Even if I pay off all of my debts, Equifax still has my name, address, birth date, employment history, and social insurance number, and that puts me at risk.So, here are my suggestions for changes to the law that I would like to see the government enact:
First, credit reporting agencies should be prohibited from having my social insurance number. They should not be allowed to report it on my credit report. They don’t need it, so eliminate it. That would make it slightly harder for hackers to steal my identity.
Second, since it’s my data, I should be allowed to access it whenever I want, for free. I realize that in the old days it was costly for Equifax and TransUnion to mail a copy of my credit report to me. They had to pay for the employee time to print the report, and the paper to print it on, and the stamp to send it.
But today, we have computers, so in theory there is virtually no cost to them providing on-line access to my data. Every consumer should have the right to access their data, online, as often as they want.
Since I’m a reasonable guy, I would agree that only my data would be available to me for free. So, data that Equifax calculates, like my credit score, would not be available to me for free. They could charge me for that data, and I could pay for it if I wanted it. That seems to me like a reasonable compromise.
Third, I think that as a consumer I should have the ability to create electronic alerts for myself, for free, so that whenever a new credit item appears on my credit report, or whenever anyone does a credit check on me, I will get an email or text alert. Again, this would all be done by computers so it wouldn’t cost Equifax that much, and it would give me greater protection.
In fact, I know that Equifax already has this technology, because they sell it to collection agents! A collection agency, or a bank, can put an alert on your file, so if they can’t find you, but then you apply for new credit or change your address or phone number, they get an alert, so they can resume collection activities against you.
Again, I realize that I am the product, not the customer, but since the technology exists, I think I should benefit from it.
Here’s the bottom line:
I realize that these suggestions I’m making will cost Equifax money, and they may make it more difficult for lenders to evaluate my credit worthiness.
But, Equifax violated my trust by exposing all of this secret data, so they are now going to have to suffer the consequences of their actions.
So, to conclude, here’s my advice:
To protect yourself:
Review your credit card and other transactions at least once per week;
Cancel any credit you no longer require;
Keep your credit limits low;
Get electronic copies of all statements, not paper copies;
Only provide your Social Insurance Number where required by law;
Request a copy of your full credit report as often as possible;
Consider placing an alert on your credit report requesting that lenders verify your identity
And the government should do the following:
Prohibit credit reporting agencies from having my social insurance number in their databases
Allow consumers to access their data, for free, electronically, as often as they want, and
Allow consumers to receive free electronic alerts whenever information on their credit report changes.
Will the government change the law? I don’t know, but if we don’t ask, it won’t happen. Regardless, there are things you can do to protect yourself, so you should take action now.
One final point: the world is changing, and changing fast. It’s likely the very concept of a credit bureau, a third party that is the guardian of our information, may not exist in the future. I assume that new technology will take their place. Perhaps banks will have facial recognition scanners in their branches to verify our identity, and perhaps block chain technology will be used to securely store our data.
Either way, I wouldn’t want to be Equifax right now.
That’s our show for today.
Full show notes, including a full transcript of today’s show and links to everything we talked about can be found at hoyes.com, that’s hoyes.com.
Thanks for listening, until next week, I’m Doug Hoyes, that was Debt Free in 30.
Yes, you can pay off your debt. Here are 9 key strategies to get you out of debt sooner.
Make all your minimum payments. Paying the minimum won’t reduce your balances, but it will preserve your credit rating.
Stop using credit. Don’t let your balances get any higher.
If you can’t control your spending, leave your credit cards at home.
Pay as much money towards your debt as you can.
Save interest by focusing on high interest debt first.
Double down on your payments. Once you pay off one credit card, apply that payment amount to your next debt.
Put extra cash towards debt. You’ll benefit in the long run because you’ll reduce what you pay in interest.
Should you cash in your RRSP? Cashing in existing retirement savings to repay your debt can have unexpected financial costs. We recommend speaking with a Licensed Insolvency Trustee before you take this step.
Talk with a professional. Did you know Licensed Insolvency Trustees are the only federally regulated debt experts in Canada? An LIT is qualified to provide you with a range of options to deal with your debt.
Make All Your Minimum Payments. Paying the minimum won’t reduce your balances, but it will preserve your credit rating. Make a list of every outstanding debt and set up a process to keep up with at least the necessary minimum payments.
Stop Using Credit. Stop building your credit balances even higher. Use cash instead of credit. Consider the convenience of debit as an alternative to credit cards.
Take Control of Your Spending. If you can’t control your spending, leave your credit cards at home. If your credit card company offers to increase your limit – say no. If discretionary spending is running your repayment plan, track your expense and cut back. Use gift cards to set spending limits at any one store.
Pay As Much Money Towards Your Debt As You Can. Paying down debt means paying less interest charges, freeing up money for other needs. The more you apply to debt repayment, the more money you’ll have available for other things.
Recognize There are Barriers to Paying Down Debt. Debt has been a problem in Canada for years and more Canadians are suffering from debt vulnerabilities. Learn about the barriers you may be facing and how to overcome them.
Pay Off High Interest Debt First. Save money on interest costs by paying down high-interest debt like credit cards first. Paying less interest frees up money to pay off debt faster.
Double Down on Your Payments. Once you pay off one credit card, apply that payment amount to your next debt. By doubling up on your payments, your overall debt load will fall much faster.
Put Any Extra Cash Towards Debt. Apply any extra money you receive, like a tax refund, Christmas bonus or a gift of money, towards debt repayment. You’ll benefit in the long-run because you will reduce your interest costs.
Should You Cash in Your RRSP or Savings? Cashing in existing retirement savings to repay your debts can have unexpected financial costs and may not be the best strategy as this is money that should be reserved for your retirement. Most RRSPs are protected in a bankruptcy or consumer proposal. We recommend speaking with a Licensed Insolvency Trustee before you take this step.
Talk With a Licensed Insolvency Trustee. Did you know Licensed Insolvency Trustee (LIT) are the only federally regulated debt experts in Canada? An LIT is qualified to provide you with a range of debt relief options to deal with your debt and make a plan to build a better financial future.
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For more than a decade the “go to” source for Canadian personal finance information has been the Canadian Personal Finance Blog operated by Alan Whitton, more commonly known as the Big Cajun Man (listen to the show to find out where that name came from; having met him to record this podcast, I can confirm that he is a big guy).
Alan worked for the biggest company in Canada, Nortel, for 20 years, and he survived many rounds of layoffs until, at age 47, he was laid off. Even though everyone knew the company was in trouble, layoffs are almost always a shock. The Big Cajun Man tells us what it was like to live through that time, with a wife and four kids, and he explains how he survived 11 months of unemployment before starting a new career.
It feels like crap, it’s not easy to do but you got to get up in the morning and you’ve got to do something every single day.
On today’s show we addressed a very common issue: What can you do when you lose your job?
Alan gives us lots of practical advice, including:
Realize that no-one is indispensable; you could lose your job, so be prepared.
When looking for a job, have your “elevator pitch” ready, so you can explain your qualifications in 20 seconds or less.
Always be networking; you never know who will be the source of your next job.
Don’t put all of your eggs in your employer’s basket. Many Nortel employees had all of their savings in Nortel stock, so when Nortel went out of business, they lost everything.
Debt management tips when facing a job loss
If you find yourself facing a job loss, take some proactive steps to manage your debt:
Cut back on unnecessary expenses so you don’t increase your debt while out of work
File for Unemployment Insurance or any other benefits you are entitled to
Create a new budget that reflects your lower income
Make at least the minimum payment on all debts
Prioritize your debts between must pay and can delay. This should be a temporary stop-gap. Stopping payment indefinitely will lead to debt problems.
Ask your creditors for interest relief or a payment deferral
If you can’t pay your bills after returning to work, talk with a licensed insolvency trustee about your debt relief options.
Doug Hoyes: What’s it like to work for the biggest company in Canada only to have it go out of business and leave you unemployed and looking for a new job at age 47? Northern Telecom Limited, or commonly known as Nortel, at the start of this century was so big it accounted for about one third of the entire value of the Toronto stock exchange. It was worth almost 400 billion dollars and had over 94,000 employees.
By 2009 it was bankrupt, which at the time was the largest bankruptcy in Canadian history and its pensioners, shareholders and employees suffered enormous losses. Of course Nortel isn’t the only company to go bankrupt, here we are in September 2017 and the bankruptcy of Sears, another company with a long history, is in the news and I’m sure there will be many more corporate bankruptcies in the future. This is a story that won’t go away.
What’s it like to go through the largest corporate bankruptcy in Canadian history? What’s it like to think you’ll be working for the same company for your entire life only to lose your job at the height of your working career? Those questions and a lot more with a man who lived through it today on Debt Free in 30, so, let’s get started. Who are you?
Alan Whitton: So I’m Alan Whitton also known as the Big Cajun Man.
Doug Hoyes: The Big Cajun Man here in the house on the podcast.
Alan Whitton: Oh yeah.
Doug Hoyes: And we will talk a little bit more about how people can find you. You have one of the most read blogs out there in the blogosphere. But why don’t you take us back to what it was like and kind of give us the quick version of it but what was it like at that time, so, the actual day you find out?
Alan Whitton: Well, so the day I – I actually knew three days beforehand because I looked in my calendar and saw meeting with my boss that the wording was completely wrong and it was all in capital letters and I looked and there were a whole bunch of others of those meetings.
And I went okay so I’ve lived through 18 different layoff scares and we’ve learned important things about HR books large blocks and I went oh crap, this looks like it’s it for me. And it happened this time. And after going through 18 of them it was really surreal because I just sort of went, oh this is weird.
Doug Hoyes: When you say going through 18 of them you mean previous rounds of layoffs that you survived.
Alan Whitton: Yeah. From 2001 on. In fact one of the layoffs they actually had our layoff packages sitting there and then another group had decided oh no, we’ll take those people and they took most of us over. So, it was –
Doug Hoyes: So it was a number of years of uncertainty.
Alan Whitton: Oh yeah.
Doug Hoyes: So when it finally happened was it a shock or was it more of like well, we knew this day was coming?
Alan Whitton: It happened – when it happens to anybody – I think there’s few people that go oh yeah, I was fine. I was sort of completely blurred and I went and actually stopped on the way home at my church because my wife worked there and my minister was there. And he was the one who sort of aligned everything and said, so I’ve known you for about nine years and every time I talk to you, you talk about how you’re about to get laid off. So, now it’s happened, can we move past that now? And I went oh yeah okay I guess I’m no longer that one-line story I’m about to get laid off.
Doug Hoyes: And it actually happened. And clearly your life didn’t end because you’re here and you’ve since gone on to gainful employment and so on.
Alan Whitton: Yeah.
Doug Hoyes: So, it was widely expected but it was still a shock.
Alan Whitton: Yep.
Doug Hoyes: But it happened. So, okay so let’s say there are people listening to use today who are working maybe for a big company that’s been successful in the past and now things are a little sketchier or maybe they’re working for a small company. I mean when you lose your job, you lose your job. It doesn’t really matter if it’s a big company, a small company or whatnot.
Alan Whitton: Yeah.
Doug Hoyes: In your case you’d been there for a long time?
Alan Whitton: 20 years.
Doug Hoyes: 20 years. So, it was your home. Frankly the only real job you’d had I’m guessing in the adult sense of the word.
Alan Whitton: Uh huh.
Doug Hoyes: So, what are the things you would tell someone who was either in that position or potentially would face it? And frankly everybody listening to this will potentially face it because it’s very rare these days that someone is at the same job for the same company doing the same work for more than a few years. So, for a working life things are going to happen, things are going to change. So, walk me through the kind of advice or things people should be thinking about in that situation?
Alan Whitton: Well, everyone is expendable.
Doug Hoyes: Everyone is expendable.
Alan Whitton: No matter how you look at it, no matter how safe you think you are anything can change in a company. I mean Nortel, everybody thought okay strange things are happening but we’re going to recover, we’re going to recover. We’re such a huge part of, you know, the entire lexicon of Canada.
Doug Hoyes: Which you were.
Alan Whitton: We were. But it just goes to show how fast things can go into the toilet. So, be careful, be always ready, have your resume needs to be within two to three months of whatever you are. And it needs to be up to date and you need to be able to do that elevator talk with people and say, you know, be able to say in 20 seconds what’s great about you and why they want to hire you.
Because once you get laid off and you start trying to look for jobs you’ll find out there’s a lot of people looking. And there’s a lot of people a hell of a lot younger than you are looking for jobs. And a mean a 47-year old former programmer that’s been doing project management, there’s a lot of those out there and it’s hard to differentiate yourself.
Doug Hoyes: And so what was your 20 second elevator pitch?
Alan Whitton: Good God.
Doug Hoyes: Or what it be today or what would be the kind of thing that you would put in that?
Alan Whitton: My experience level is across the board. I’ve worked on different projects in the government now and at Nortel Communications understanding of all, many technologies. The breadth of my understanding is the major selling point I’d always had. Depending on who I was talking to I’d talk specifically about their areas.
Doug Hoyes: It’s interesting though because I’m just thinking in my mind what would be my 20 second elevator pitch? And I don’t know, I haven’t thought about it. I could give you a pretty good 15 minute one. Let me go on this rambling sojourn of my whole life. But 20 seconds is – that’s really tight, that’s tough to do.
And I definitely like the idea of having a resume handy because frankly it’s not that hard to do. You probably had to make one up when you got the job you’re at. So, go back on your computer and maybe it’s once a year, every six months, on your birthday, on Canada Day, I don’t know when you do it but set yourself some kind of schedule. I guess the answer is every time something changes you get a promotion, you change whatever, get it updated so that if you were to get laid off tomorrow no problem, I need 10 minutes to put, you know, end date 2017, boom resumes ready and out it can go.
Alan Whitton: And the danger is if you’ve been at a company a long time, you get lazy. You go oh, well I don’t need to have an updated resume, I’ve got a good job. I mean I might need it to apply for an internal job, no you need it. And it needs to be out there too.
Doug Hoyes: Well, even if you don’t ever need it for an external job presumably there’s some kind of performance review, salary review, things that happen in a big company, you might as well have the information at your finger tips.
Alan Whitton: Yeah, understanding and remembering what you’ve done too, like having, using something like LinkedIn even having a resume there that you can start from is important.
Doug Hoyes: And with LinkedIn it’s out there, everybody can see it.
Alan Whitton: Yeah but assuming that people can see it just because it’s on LinkedIn isn’t enough. You’ve got to be networking. And if you think you’re about to get laid off you better start networking now.
Doug Hoyes: Or a year ago.
Alan Whitton: Yeah because everybody’s – everybody can be someone who can find you a job. I mean in my case the job I ended up with in the government I ran into a guy I used to work with at Nortel and his daughter and my daughter were graduating from middle school. And I just saw him and said, he said hey, how’s it going? And I said, I might be looking for a job and from that, that’s how I ended up with the job.
Doug Hoyes: You never know where it’s going to come from.
Alan Whitton: Exactly.
Doug Hoyes: So no one is indispensable, have a resume handy, always be networking, have your elevator pitch ready. That’s pretty good, that was just one point that I asked you for. So, give me some other advice then from your time going through this.
Alan Whitton: Well, so I go to church and we had one guest minister one week who said we’re all three paycheques from living on the streets. If you’re, you know, even if you’re not thinking you’re going to lose your job, you need to go through your finances and go what happens if I get laid off next week? What happens if I get off next week and there’s no severance because there’s a lot of companies now that are not paying severance.
Doug Hoyes: They just disappear.
Alan Whitton: They just disappear off the face of the earth you don’t get no more money. Oh, I have an emergency fund. Can your emergency fund withstand you, if you’re the only breadwinner, deal with that?
Doug Hoyes: Yeah and I disagree with your minister. It’s less than three paycheques for most people I’m guessing.
Alan Whitton: Well, you’re in the business so I would say –
Doug Hoyes: Perhaps I’m skewed because of the people that I end up helping but, you’re right, it’s a perfect thought experiment to do. So, ask yourself that question, if tomorrow when I go to work or the next day I go to work they say oh sorry, the company is no more, it’s just shut down, that’s it, it’s done, what would you do the next day? Do you have money in the bank? At the very least, do you have a line of credit you could use to pay the rent? I hate to go into debt for something like that but if you’re already maxed out on all your debt you’ve got no wiggle room whatsoever.
Alan Whitton: My wife’s comment on that when I pointed that out to her was emergency preparedness. And I mean you war games, it you sit down with someone and you just maybe bounce it back and forth with them and say what can I do? Just have something in mind because you better than I do, you’re in the business. People are going to walk in off the street. I mean I know people who have two incomes and someone lost, you know, two of my incomes, so two times my income level who ended up in pretty dire financial straights because one of them lost a job.
Doug Hoyes: Yeah and part of that is because it’s very difficult to downscale your expenses immediately. because what are your big expenses? Well, I pay the mortgage or the rent, I pay for my car well tomorrow if I lose my job I can’t just get rid of my house in a day, I can’t get rid of my car lease in a day. So, yeah okay maybe I don’t eat out as often, that saves me a few bucks but it’s very hard to instantly downscale your life.
Alan Whitton: And what if your kids are going off to school? And you said we’re going to help you, we’ve got your RESPs here ready. And now you’re looking at all this money and you’re going, you know, I could really use that money instead of you getting a RESP and going off to school. Why don’t you go get some OSAP and I’ll take some of that money?
There’s all of that – and that was actually part of what happened with me was my oldest daughter was going off to university and my two younger daughters were still in high school and I’ve got a son who is 3, 2 at the time.
You know, it was sort of a perfect storm of lousiness that happened because there was a health issue, there was being laid off and then there was dealing with all this and with the kids and all that. And if you think oh, yeah I’m going to be stoic and I’m going to – no, you’re not because this will take the legs out from anyone whether you think you’re going to pull it off or not.
Doug Hoyes: Because you just don’t expect it to happen. So, okay so let’s continue on with your points then. So, I mean this sounds to me kind of putting all your eggs in one basket type of thing then.
Alan Whitton: Yeah, you better get – in my case with Nortel, I lost money. I didn’t lose as much money as a lot of my co-workers did who had things like – they had a lot more stock and they wanted to – they thought they were going to be millionaires because they had options, they had this and that. For me I never got into the options game, I never had much there.
But I believe I got this from the Canadian Capitalist or someone, you can’t – you’re already far too invested in your employer. If you’re getting stock from them, if you’re getting all this other stuff from them, you better get out of their business. You’re getting paid by them, in my case I got a pension from Nortel as well. I should have had none of their stock or very little of it. Now luckily I ended up selling a lot of it along the way to pay off bills, pay for cars, but you can’t put all your eggs in your employer’s basket. You’ve got to be much more diverse.
Doug Hoyes: Yeah and that’s good advice in general. So, you ask people so tell me what’s on your personal balance sheet? Well, I own a house end of story. So, I don’t have anything in a RSP, an RESP, a TSFA or anything like that, I own a house and I got a lot of debt. Well, that is having all your eggs in one basket as well. So, totally agree with that, that sounds like obvious advice. So, you lose the job, obviously you’ve got to find another one.
Alan Whitton: Right.
Doug Hoyes: So, give me some tips on, you know, looking for a job.
Alan Whitton: Everyone you meet is someone you could network with. Talk to them and say well, you know, are their jobs at your place? Now the danger is when you get unemployed you end up hanging out with other unemployed people because you’ll go to services and things like that. I was lucky enough to have a fairly good service. But when you’re talking with other unemployed people, that’s not networking, that’s commiserating.
You need to talk to people who have jobs who will be able to say yeah, we got jobs here or no I’ve heard from Bob that he’s got jobs over there. And when you start looking for jobs and you’ve your resume ready, remember what your social media is. This is your references, Facebook, every tweet that you’ve put out there, every employer is going to look at this now, when I was looking for jobs back in 2008 not as much.
Doug Hoyes: Not so much. Twitter wasn’t a thing back then.
Alan Whitton: But all of those crazy things you’ve done in your life, all the weird pictures that are on Facebook when you were down in God knows where, you know, there’s a funny picture of that.
Doug Hoyes: So I’m just going to pause the tape and delete all my tweets right now. I guess we’ll be back in five hours.
Alan Whitton: I’m lucky that I’m close enough to retirement now that I think more likely than not they just say can you just go away? Here, here’s a retirement package.
Doug Hoyes: But that’s much better advice for a millennial who’s, you know, 30 years old and has lived through the social media age the whole time and does have that whole online history. You know, you and I, we’re in our 50s, you know, perhaps not so much. But everything is a potential reference. So, you know, always be networking, you hit on that. What else in terms of looking for a job. Everyone’s a potential source, what are the other places that you would be looking, what else would you be doing?
Alan Whitton: If you go to a job fair, please don’t wear flip flops.
Doug Hoyes: Don’t wear flip flops, that might be the title for this episode. Now you’re giving me an exaggerated example.
Alan Whitton: No, I’m not. I’ve been to job fairs.
Doug Hoyes: Because no one is going to go to a job fair wearing flip flops.
Alan Whitton: You think oh, I’m just talking about young ladies and things. No, no I’ve had people walk in with flip flops and their flash t-shirts at job interviews. And you go okay, I dig the fact that I work in technology and I understand free spirits are out there, I got no problem with this kind of stuff if we’re going to keep you in the back, that’s fine.
But first impressions are amazing things. If you’re going to a job interview don’t cut anybody off. If you’re taking the bus, give up your seat. You never know who is going to end up interviewing you. And that has happened to me more times than not where I’ve walked into situations where I’m going oh look who’s interviewing me, the guy who I called a so and so, so and so. Boy this is going to go really, really well.
Doug Hoyes: Yeah, I hope he likes my spunk. It might not be the answer. Well and you’ve actually seen people wearing flip flops to job fairs and job interviews. I mean I can tell you a similar story of a muckity muck reception where somebody was dressed the same way. I mean do you not know who you’re here to meet? Do you not understand the big picture?
Alan Whitton: And I realize we’re old farts. And my father told me you dress well and all that and first impressions are lasting impressions. And unfortunately that’s one of my few skills I have in life is my first impressions of people after I give you 10 or 15 seconds, is right most of the time unfortunately. You know, if I’m seeing you walking in with flip flops on and you’ve got a look on your face of I don’t want to be here, well, that – you know, those of the four thousand resumes I got, that one was easy to deal with because that went into the shredder before it even got on my desk.
Doug Hoyes: Yeah, don’t count yourself out right at the start.
Alan Whitton: Well, yeah don’t do things like that. Just, you know, you’re applying for a job, you’re trying to convince these people that they want to hire you. And in my case, I’m an older guy and I got interviewed by people that were 15 years younger than me, I’m trying to convince them that they want to hire me. Well, they’re going to be going well, why would I want to hire an old fart like you? You’ve got to convince them that you’ve got skills that they want, make sure the skills are way highlighted and you can get that point across as opposed to me.
Doug Hoyes: Yeah and the age thing is interesting because in some cases being old is a disadvantage but in other cases being old is an advantage. You’ve got to find your spot. Like if you’re going to get a job working at the LCBO, you know, you can’t be 16 years old. And in fact, for a job like that yeah, probably the older you are, within reason, the better. Okay, you’re dealing with a sensitive product here and so it becomes more of a thing. And that’s just an example off the top of my head but you got to play to your strengths, right?
Alan Whitton: Exactly.
Doug Hoyes: And so if experience is, you know, I’m old that means go for the jobs that –
Alan Whitton: Well, especially where I am right now with project management. Having a broad understanding of all parts of the project and then being able to say, when someone says here’s the project plan and you go okay, here, here, here, and here are all areas of risk. Where’s the risk plan for that? And they’re going oh, I didn’t think of that as risk. And you’re going these are the things that can go wrong and they’re going well, how do you know that?
Doug Hoyes: Because I’m old, I’ve been through it, I’ve seen it.
Alan Whitton: Yeah, exactly, 25 years, I’ve gone through this and because of some toad we couldn’t put a cement pad over there because someone said you couldn’t so you lost six months with that. Well, what are you going to do about it?
Doug Hoyes: Yeah and that’s where experience really comes in.
Alan Whitton: Very much so.
Doug Hoyes: Okay, so what other tips have you got then? I mean normally what we do at the end of the podcast is we go through all the practical advice but we’re just going to do the whole thing as practical advice here today. So, any other tips you’ve got for people who have either been through a lay off or are going through a job search?
Alan Whitton: Well, it feels like hell, like I was actually out of work for 11 months.
Doug Hoyes: Wow.
Alan Whitton: And I was lucky enough that I actually got severance from Nortel, I was in the last group that actually got paid out or had the potential to be paid out. The people that got laid off after me are still fighting to get 5 cents on the dollar on things. So, it feels like crap, it’s not easy to do but you got to get up in the morning and you’ve got to do something every single day. You’ve got to look for the jobs and you can’t let yourself go. Jobs are out there.
I mean millennials in some ways are lucky in a weird way because they’ve got three part-time jobs. They get laid off from one they still have two part-time jobs. But then they’ve got to find a job when they’ve two jobs to already take care of. So, I mean the job hunt now I don’t know if I’m in tune with it because I’m eight or nine years out of it.
Doug Hoyes: And the comment you made about millennials is exactly right because I know tons of them who are in exactly that situation. I was talking to one last week and it was like well, I’m lucky because each of those three jobs is flexible because, you know, one of them’s in retail so I’m working in the evenings. One of them’s, you know, an office job which is more during the day, one of them I do on the weekends.
And so you’re right in one sense they’re protected because well, if you lose one job you’ve only lost one third of your income. But it’s not a great life having three jobs, having to bounce from one to another, trying to coordinate schedules, I do a four-hour shift from 5am till 9am in the morning, I got to take a bus across town, I go back home, I sleep for two hours, get back on another bus for another hour and do another four-hour shift somewhere else. It’s not an easy life. But I think, you know, the main point is you’ve got to be looking ahead and at some point things with change you want to be ready for it. Is that the pretty simple summary of it?
Alan Whitton: Yeah. And I mean at the end of it all when you reach our age, I don’t know if you have the same level of cynicism as I do but I mean I posted this tweet a couple of weeks ago. It’s a bad line but I started off wanting a career, it ended up all I really wanted was a regular paycheque, right? Like when I was younger I was thinking oh, going up here, I’m going to be a manager, this and that. Yeah, you know, it was kind of fun. I worked with some amazing people, I had a great time.
But holy cow at the end of it all it really was the paycheque that you wanted. Finding the jobs, it’s not easy but you’ve got to be prepared and you’ve got to be ready and it can happen at any moment. Like you don’t know what you’re going to find out tomorrow morning. Not to use too many scare tactics but especially with the millennials, how you deal with having any part-time job is to put together with the full-time job you have, how do you look for a job when you have other things going on in your life? It is not an easy thing.
Doug Hoyes: No, it’s definitely difficult. So, I want to morph into the final topic which is a little bit more about your website and what you’ve done with it. So, obviously, you know, you no longer work for Nortel, you’ve mentioned that you’re now working for the government, you’ve reinvented yourself, you’ve got the big website now which I think has 100 million views a day.
Alan Whitton: Huge.
Doug Hoyes: I believe is what it gets. So, it’s the Canadian Personal Finance blog, when did you start that?
Alan Whitton: I started that the month after my son was born in 2005.
Doug Hoyes: Now did we have the internet then? I’m just trying to think back that far.
Alan Whitton: So, it wasn’t that long before that the World Wide Web had been born.
Doug Hoyes: So it was just invented and you came up with a blog. So, people know you as the Big Cajun Man. What’s the deal on that?
Alan Whitton: That was a rude turn of phrase that I was at a golf, playing golf with a few friends and some, a cohort, a friend came by and saw me wearing a silly straw hat and said what does that idiot think he is, some kind of big Cajun man?
Doug Hoyes: So it’s an insult and now it’s become your second name.
Alan Whitton: Yeah it got stuck to me by my friends. I have some wonderful friends that way.
Doug Hoyes: Excellent. Well, there’s nothing wrong with that, why not then? So, give us the overview of what’s on the blog.
Alan Whitton: A lot of do as I say not as I do advice. You know, after having three kids go through university, using the RESP program, having a son that’s on the autism spectrum, dealing with the RDSP program, investing, going through a layoff, which happened three years after I started the blog. So, there’s a whole bunch of really raw posts about getting laid off that I’ve left as intact because it’s interesting for me to read as much as anything else.
And in some ways this is sort of an open letter to my kids saying, you see all these crazy things I did, don’t do that or yes do this and if anybody else gets some stuff out of it, I really want to help the people with disability savings plans and things like that because there’s so many people out there that are trying to make an extra buck off them. And I just can’t stand that.
Doug Hoyes: Well and I think that’s an excellent topic so I’m going to ask you back and we’re going to talk about RDSPs because we’ve never discussed that before on the show. So, what you’re saying is the blog – and how many posts do you have on it?
Alan Whitton: About 3,000.
Doug Hoyes: Three THOUSAND, so, if someone has a few months to kill you’ve got lots of time. But it’s organized in such a way that if what I’m really interested in is, you know, RESPs or RDSPs or, you know, getting laid off or whatever I can click the button, find that tag and read those posts.
Alan Whitton: Yeah, for most of it. It’s still a big rag tag in spots. I’ve got to work on the searching. I always mean to do things about it. But once you have 2,500 or 2,700 posts you start going back over them and you start deleting a lot because you go what the heck was I thinking about that? But I used to write like every day five days a week and then sometimes on the weekend and you end up building this huge backlog that I’ve been spending a lot of time just reading. I haven’t been posting that much lately and it’s because I’ve been going back and cleaning things up.
And a lot of that is appearing now on my Twitter feed, you’ll see a lot of my best of and older stuff. It’s advice to help you out. It’s the things I’ve done. There are some really smart people about investing, there are some really – you’re a great bankruptcy trustee. The Blunt Bean Counter will give you accounting stuff up the wazoo and he has helped me out tremendously with the RDSP and a few other things.
I’m not going to give you that kind of advice because I’m not that kind of expert. I’m just the Joe on the street kind of guy who’s gone through a hell of a lot of interesting stuff. And I’ll usually say I have no idea what I’m talking about here and I’ll ask for advice. And it’s surprising, I’ve got some really smart readers who’ve applied back going, hey dummy you’re doing it the wrong way, which is great.
Doug Hoyes: Yeah because the comments on the blog are just as good as the articles itself because they chime in.
Alan Whitton: I like it when people put in comments. Like one of my RDSP posts has like I don’t know 250 different comments from people saying I can’t get it done, how do I do this? And we usually try and help them out. And my wife does a lot of help work with me on the RDSP side of things. So I mean the blog itself, it’s not a business really. I’d love to make millions of dollars like I am right now.
Doug Hoyes: Yes, of course, of course, we assume you’re making a million dollars a week on it.
Alan Whitton: Absolutely but it is what it is.
Doug Hoyes: So why don’t you just sell out, you could put – you’ve got all these different posts about all these different things. Go to whatever the biggest RESP company there is or RDSP company or whatever and say hey, I got this blog, it’s been going for years and years, it’s got 3,000 posts on it, tons of people read it. I’ll just put whatever you want on it, give me a few million bucks and off we go.
Alan Whitton: Yeah, I really couldn’t wake up in the morning and look at myself after that. I already joke about the fact that I’m a six figure blogger, I make enough money in my job to do this. I want to help people with this stuff and there’s a lot of people that need help with this stuff. I mean you’ve dealt with enough people on the debt side of things, all my debt stuff ends up being relatively straight-forward answering. You get to deal with the real grungy part of things.
There are enough people out there who are media savvy and understand how this all works and are really going to blind you with some really good stuff. I’m just going to write with you what I can. It’s not always going to be the best writing, I’m trying to fix a lot of that. I’ve actually – when you have 3,000 posts there’s a lot of rewrite you do.
Doug Hoyes: But I think you raise a very good point and that is there are many different sources. You raised the Blunt Bean Counter, who I believe is a chartered accountant.
Alan Whitton: He’s a partner [unintelligible [00:28:54]
Doug Hoyes: And a partner at a big firm or wherever. So, obviously he’s got a lot of really good technical advice. And so obviously you need people like that. I hope that’s why people come to see what I do as well. Your advice is from actually being out there and doing it.
Alan Whitton: Yeah and I mean having four kids has been an amazing thing in my life but you learn a lot of stuff about the importance of –
Doug Hoyes: Vasectomies, too late now I guess.
Alan Whitton: Well, I already had one and that didn’t work, which explains my son. One of these days I’m actually going to put that post up there. But no, Reece appeared two years after my first vasectomy.
Doug Hoyes: Excellent.
Alan Whitton: The second one worked a lot better.
Doug Hoyes: There you go. So, well, so you’ve lived life then, which is exactly what you’re saying.
Alan Whitton: Yeah and it’s a slice of life at times.
Doug Hoyes: No pun intended.
Alan Whitton: A painful one anyway. But I’d like to be able to put a lot more expertise, a lot more polish on these things but it’s not really what I do and it’s not my expertise. My expertise is just sort of getting stuff out there and having people argue about it.
Doug Hoyes: But that’s how you learn is by – you learn by doing it. So, okay so how can people find you then? Where is the blog?
Alan Whitton: The https:
Doug Hoyes: It’s S now?
Alan Whitton: Oh yes I just kicked it over to S. I’ve lost a whole bunch readers because Google’s wiped me out of their index. So,//canajunfinances.com. So, it is – it sort of went with Big Cajun Man. Tom [Drakerty] had Canadian Finances at the time so I went alright, well I’ll call it canajunfinances and thought it was hilarious. And of course no one finds it now. But you can look for some of my, you know, a lot of my posts if you just do a search for, you know, like five steps to a RDSP you’ll find one of my posts on that. I’m out there.
Doug Hoyes: And how can people find you on Twitter?
Alan Whitton: So there’s @bigcajunman is the actual Twitter feed out there. I’m on Facebook as well. There’s a Canadian personal finance page on Facebook. I’m on pretty much every social media. So, if I actually tried to wipe myself on social media I’d be spending about four or five months.
Doug Hoyes: MySpace, you’ve got a MySpace page?
Alan Whitton: I had a MySpace page. I’m old enough to know what that means, having dancing bananas on everything, it was fantastic.
Doug Hoyes: All the millennials are going, what is that like Geocity?
Alan Whitton: Geocities and those little torches that you had on the webpages, that was fantastic.
Doug Hoyes: That was awesome, so, excellent. Well, I think that’s great. And as I said, there’s a ton of stuff on there. If you want to get into an issue from the point of view of someone who’s been through it and we walked you through a whole bunch of things that were on the blog now then. That’s a fantastic way to do it. So, Alan thanks very much for being here.
Alan Whitton: Thank you.
Doug Hoyes: Definitely appreciate it. So, I’ll put full links to the Canadian Personal Finance blog to the show notes but again it’s at canajunfinances, see it is pretty funny, canajunfinances.com. full show notes, links and a full transcript can be found at hoyes.com that’s h-o-y-e-s-dot-com.
That’s our show for today. I’m Doug Hoyes, thanks for listening. Until next week, that was Debt Free in 30.
We make a lot of purchasing decisions every day. But are our decisions as simple as needs vs wants? Sure impulse purchases can cause debt problems, but sometimes even when we think we are making the right financial choice we may not be. Our emotions can make us think we are behaving rationally when we are not.
Our average client has over $50,000 worth of unsecured debt and, contrary to popular believe, the vast majority didn’t get there by going on a spending spree. Yet their initial road into debt can often be linked to their behaviour around how to handle financial decisions.
Numbers are Rational
Over the years I have had hundreds of clients who financed a house that ended up being more expensive than they could afford. So they ran some numbers, made a budget, looked at the monthly payment and decided their choice made sense.
That one purchase caused other debt problems. A bigger house meant more furnishings, higher property taxes and insurance, larger repair bills. An expensive car bought on an 84-month at the end didn’t look so good.
When I ask them why they made that purchase, even though in hindsight it was obviously more than they could afford, they give me many rational reasons. They tell me the mortgage payments are cheaper than rent; the house will go up in value enough to cover off the extra costs; the new car is covered by a warranty so I will save on car repair costs; I will save money because it had better gas mileage; or it was more reliable so I will make it to work on time. All this seems logical but it isn’t.
Humans Can Be Irrational
Those are rational reasons, but when I ask more questions it becomes apparent that they bought the house or car for emotional, not rational reasons. They were afraid house prices would keep going up, so they bought now, or all of their friends were buying, so they did too. They bought that car because they really wanted that car and the financing person at the bank or car dealership made it look affordable.
True rational choices take time. They take research. They take math. And that’s hard. Which is why we let our emotions rule our decision making.
If you want to make good financial choices, it’s not just about creating a budget. Take the emotion out of the decision. Ask yourself why you are making that decision so you force yourself to try to look at things rationally.
FULL TRANSCRIPT show #159 How Emotions Can Lead to Debt Problems
This year on Debt Free in 30 I’m devoting some of our shows to money questions that you don’t hear answered a lot, but can have a big impact on your financial health.
Here’s today’s question:
How do our emotions lead to debt problems?
At first glance, this may seem like a very obvious, or a very silly, question.
It’s obvious because sometimes you are in a store, and you see something you want to buy, so you pull out your credit card and buy it. Your emotions told you that you wanted to buy it, and so your emotions lead to credit card debt. Seems simple. It’s the common needs versus wants discussion.
But let’s face it, most people don’t go bankrupt because they put $100 on their credit card with an impulse purchase at a store.
Our average client has over $50,000 in unsecured debt. It’s pretty obvious that it’s more than just impulse purchases that are causing their debt problems.
Yet it’s still our emotions that can be linked to almost all of our debt.
You probably don’t think you let your emotions rule your big financial decisions. You believe that you only use a rational thought process to make your big money decisions.
Let’s test that theory.
Let’s talk about Fred.
Fred wants to buy a house. Being logical, what does he do?
Fred starts by making a budget to see what he can afford. Then he contacts his bank to get pre-approved before he starts house hunting. The person at the bank crunches the numbers to tell Fred how big a mortgage he can afford.
It’s all numbers, and numbers are not emotion.
Numbers are rational.
But wait. The bank rep tells Fred he can actually afford a bigger mortgage than he thought. Fred is happy, because he thinks real estate prices will go up, so he’s happy he can finance a more expensive house than he thought, because now he’ll make even more money, and he doesn’t have to worry about missing out and not being able to buy before prices go even higher. Fantastic!
What just happened there?
Fred was swayed by his emotions. His fear of missing out influenced his decision. That’s emotion. His elation at the bank approving him for an even bigger mortgage than he expected is also based on emotion, not rational thought.
Of course not everyone gets pre-approved for a mortgage first. Lots of people see a house for sale in their neighbourhood, and because it’s a nice house near the kid’s school you make an offer on it, and then figure out later how to pay for it. That’s obviously an emotional approach to financial decision making.
Here’s a question for you: why did you buy the car you have now?
I ask a lot of people that question.
They often tell me they shopped around, and that this car has the best gas mileage, or safety rating. In other words, it was a purely rational decision.
Then they tell me they got the best value for money or they got the lowest monthly payment from the car dealer.
Sounds reasonable. When it comes to money, we make rational decisions.
Money is numbers, and there’s nothing more rational than a number, right?
Nope.
I can tell you lots of stories of guys, and it usually is males, who bought a car that ended up getting them into financial trouble.
I ask them the numbers, and it usually takes a bit of thinking, but then they:
Tell me that their loan payment is $600 per month.
Their car insurance is $400 per month.
And then there’s gas and the occasional oil change.
That’s $1,200 per month. They make $2,400 per month, so their car is costing them half of their income. I see it all the time. They only have $1,200 per month to pay rent and buy groceries and live, and they can’t do it; there isn’t enough money left over after paying for their car expenses.
So I ask them, why did you buy the car that you can’t afford, and they give me more rational reasons:
I need it to get to work;
My shift starts early and I can’t take the bus;
I bought a new car because I don’t want to be stuck with big repair bills.
Those are rational reasons, but are those really the reasons you bought the car you drive today?
I don’t think so.
Think back to when you bought your car.
You walked into the car dealership, and you looked at the cars. You had an idea of what you wanted but in truth you likely picked one that looked good, or was a nice colour, or was big, or fast, or had whatever characteristics you were looking for in a car.
You took it for a test drive, and the salesperson said “imagine what it would be like driving to work in this baby!”
See what happened there?
Each step along the way you made a decision based on emotion.
You liked the look of the car, you liked the colour, and you really liked thinking about what your co-workers would say when you drive up to work in your new car.
Those are emotional responses.
So why, when I ask you why you bought the car, do you tell me it was because of the gas mileage or the safety rating?
It’s because we don’t want to appear to be emotional decision makers, so after the fact we justify our emotional decision by citing rational justifications for our decision.
Most of our money decisions are emotional, not rational.
Now I know, you don’t agree with that.
You agree that most people are emotional, but not you. When it comes to money, you make sound, rational decisions.
Okay, let’s put that opinion to the test.
When you walked into the car dealership, who greeted you at the door? It was the salesperson.
And you, being the rational person that you are, immediately said “before I talk to you, I want to talk to the finance manager please”, right? That’s how it happened?
Because if you are a rational person, you would want to crunch the numbers first to determine what you can afford, and then start looking at cars.
But of course, it never happens that way. The finance person is the last person you talk to, not the first.
The salesperson knows that if they start by talking to you about money, you will probably end up buying the car that has a $400 loan payment per month, not the $600 one, and that’s not as good for their commission. Or you will want a five-year term where you pay less in interest, not an eight-year term to make the monthly payment lower even though that means you pay more in interest, and that’s not as good for the finance manager or the salesperson.
They want you to make an emotional decision first, and then justify your decision with rational reasons later.
I’m not criticizing the car dealer. They are doing their job. It’s not up to them to analyze your finances. Their job is to sell you a car.
Here’s another example: last week on this show we talked about student loan debt, which is now at epidemic levels in Canada. Why do students get into so much debt? Often, it’s because they make an emotional decision to go to college, not a rational one.
If you knew at the start of university that you would graduate in four years with $50,000 in student loans, and that you wouldn’t be able to find a job in your field, would you go to school? Probably not.
How many students, before they sign up for school, actually determine what type of job they are likely to get upon graduation, and what that job will likely pay? How many then calculate how big their student loans will be when they graduate, and how long it will take them to pay them off?
In my experience, very few.
And yes, I realize it is almost impossible for an 18-year-old kid to accurately evaluate what the job market will be four years from now to determine whether or not they’ll be able to repay their student loans. I get it. It’s very difficult. And because it’s difficult, instead of devoting a lot of time to doing the research and the math to figure it out, we fall back on emotion.
An 18-year-old student, and their parents, say “you need college to get a good job”, or “college is a good safety net”. That’s conventional wisdom, based on emotion, not rational arguments.
So why do we rely on emotion when making important financial decisions, like buying a car or going to college?
Because rational decisions involve research, and time, and math, and math is difficult.
When the finance person at the car dealership says they can get you the loan, but it will be an 8-year loan, you don’t take the time to crunch the numbers and figure out how much extra an 8-year loan will cost you as compared to a five year loan. That’s not a calculation you can do in your head, so you agree to buy the car and move on.
Over the last 20 years I’ve met with well over 10,000 people in financial trouble, and based on my experience, many of those people got into financial trouble because they let their emotions guide their financial decisions.
I’m not saying emotions are bad. Quite the contrary. I hope you get emotional when you listen to a great piece of music, or watch a great movie.
All I’m saying is that when it comes to numbers, emotions should not be the main reason you make a financial decision.
So here’s my advice.
First, and most importantly, before you make a financial decision, like buying a car, or a house, or anything else that involves money, ask yourself this simple question:
“Why am I making this decision?” Am I making a rational decision, or am I letting my emotions make the decision for me?
In practice, this is more difficult than it sounds, because it’s hard for us to take a step back and analyze what we are doing, but that’s what you must do.
Here’s the next question to ask yourself: who is encouraging me to make this decision? Why?
When a car salesperson suggests you buy one of the cars on their lot, you understand what’s going on. They are a salesperson. They want you to buy one of their cars so they can earn a commission. No mystery there.
But what about when all of your friends, and your parents, tell you that you should stop renting and buy a house; why are they giving you that advice? Unless your friends or your parents are real estate agents, they don’t earn a commission if you buy a house. So why are they giving you that advice?
Presumably it’s because they are trying to help you, but this is where you must think hard to understand where they are coming from.
If your parents have owned a house for the last 30 years, their house has gone up in value, a lot, so since owning a house was a successful strategy for them, they want you to follow the same path.
That’s understandable. That’s why the conventional wisdom is that owning a house is the most important investment you can make.
But just because your parents lived in the same house for 30 years and made money doesn’t mean that your experience will be the same.
If you bought a house in Toronto in the spring of 2017 it is likely worth less today, a few months later. Of course, by next year it may be back up in value. I don’t know. But it’s also possible that if you buy a house today you may need to relocate next year, and will have to sell your house, and incur real estate commissions and other costs.
My point is that your situation may be different than your parents and your friends, so you can’t blindly follow their advice.
I get it. If everyone you know owns a car, you don’t want to be the only person taking the bus. If all of your friends are flipping condos, you don’t want to be the only person who rents. That’s why we succumb to pressure from family and friends and make decisions based on emotion. We want to follow the crowd, but that emotional approach often leads to bad decisions.
So that’s why my final piece of advice today is to think through not only what your decision is, but why you are making that decision.
If the answer is “I have a stable job and I’ll live here for 10 years, and we have a dog and a cat so it’s difficult to rent, and we’ve crunched the numbers and we’re buying a house we can afford, even if interest rates go up” then great, buy the house.
That’s a rational decision, and that’s all I ask you to do.
That’s our show for today.
I’ve got lots more to say about how emotion and conventional wisdom lead us to make bad financial decisions. In fact, I wrote a book on it. It’s called Straight Talk on Your Money, and it’s available now in better bookstores across Canada, and online at Amazon and Indigo, and there is also a Kindle and Kobo ebook version, and an Audiobook available at Audible and on Amazon and iTunes. Full details on the book can be found at StraightTalkMoney.ca
As always, full show notes and a transcript of today’s show can be found at hoyes.com, that’s h-o-y-e-s-dot-com.
Next week I’ve got a great first-time guest, a person who has run one of the top financial information websites in Canada for many years, so you will want to tune in for that special show.
So, until next week, thanks for listening, I’m Doug Hoyes, that was Debt Free in 30.
Financial problems can happen at any age. While the average age of the typical bankrupt person we see is in their mid-40s, we have helped individuals as young as 18 and as old as 91. Although filing insolvency is fairly rare for people in their 20s, it is not uncommon. In fact, a study by our firm found that 14 percent of all insolvencies were filed by individuals under the age of 29.
What causes someone so young to file for bankruptcy?
Younger bankrupts are more likely than the average debtor to list financial mismanagement as a cause of their bankruptcy. It is not, however, the sheer magnitude of their debt that is at issue, but rather the types of debt they are incurring.
In fact, debtors in their 20s have the lowest unsecured debt of all age groups. They haven’t had a lot of time to accumulate a lot of debt. Even their unsecured debt-to-income ratio is low – 120% as compared to 185% for the average insolvent debtor.
For many millennials, it is instead the inability to find a job that pays well enough to cover living costs and, in many cases, repay their student loan debt. A growing area of credit mismanagement for younger debtors is the use of high cost debt options like credit cards, subprime car loans and payday loans. Inability to qualify for better credit options means that they are increasingly turning to subprime debt choices like payday loans. Over one third debtors below the age of 30 carried at least one payday loan. This demographic exhibits the highest usage of payday loans among all age groups even if their total payday loan debt, at $2,292, is lower.
Should You File Bankruptcy? 3 Big Considerations
Whether or not someone in their 20s should file for bankruptcy depends on what debts they carry and what recovery potential they have.
Non-forgivable Debts
An increasing number of insolvent young debtors carry student loans. In our most recent study, 31% of all young debtors had a student loan. However, it is important to understand that millennials (those in their early 20’s) are not filing bankruptcy to get out of paying their student debt obligation. In fact, they can’t.
In Canada, student loan debt cannot be included in a bankruptcy until a debtor has ceased to be a student for at least seven years. While not impossible to have their student debt forgiven earlier, certain conditions of undue hardship must be met. If the only debts owed by a young debtor are student loans that are not dischargeable, then bankruptcy is not a suitable solution. Those who are filing bankruptcy are doing so because they are also struggling under the burden of excessive car loans, credit card debt and payday loans.
Credit Recovery
Filing bankruptcy should always be a last-resort option for a young person, even if your debts are fully dischargeable by bankruptcy as it will damage a young person’s credit for a period of time. In Canada, a bankruptcy remains on a credit report for six to seven years after discharge.
While it is possible to recover from the negative impact on your credit score as a result of bankruptcy, this process will take time. During this period, access to credit will be limited and any credit obtained will likely be expensive. This may be of particular concern for those looking to start a family, buy a home or even purchase a car.
Employment Considerations
While young debtors experiencing severe financial problems do file bankruptcy, almost half choose instead to make a proposal to their creditors. For those who are earning a higher income, a bankruptcy and its required surplus income payments may be too expensive. A consumer proposal allows them to lower their monthly payments and begin the process of managing to live within a healthy, balanced budget sooner. In addition, certain occupations do not permit an individual to be bankrupt. Potential employers today may even ask for permission to run a credit check as part of the hiring process. An individual who files a consumer proposal can confirm on a job application that they are, in fact, not bankrupt.
To Choose You Should Run the Numbers
For anyone experiencing debt problems, the best solution is based on a review of their individual circumstances. It is important that they sit down with a licensed bankruptcy trustee to review a list of their debts, their assets and their future earning potential.
The first step is to create a budget to determine how much the young debtor can apply toward debt repayment. If their debts can be repaid by following a structured payment schedule and they can rebuild their savings in less time than the resulting negative impact on their credit report, then filing bankruptcy may not be the best solution.
If, however, their debts are so severe that it is unlikely that they will be able to maintain much more than the minimum payments toward those debts for the foreseeable future, then bankruptcy or a consumer proposal may be the solution they need to start over. It is possible to begin to rebuild savings soon after filing, which can provide a necessary down payment for future credit needs when the time comes.
Filing a bankruptcy or proposal can give you a fresh financial start. Contact us for a free no-obligation consultation with a local Licensed Insolvency Trustee to review your options.
Student loan debt is a massive problem in Canada. The average student loan debt resulting from a four year degree program is over $26,000, and a student could end up paying more than $10,000 in interest before the loan is repaid.
How Are Student Loans Treated in a Bankruptcy?
A government guaranteed student loan is only discharged in a bankruptcy if you have ceased to be a student for over seven years at the time you file bankruptcy. So it is very sad that 15% of our clients still have student loan debt at the time they file with us, meaning they’ve been trying to pay that back for seven years already.
Even worse, the burden of student loans are disproportionately felt by women.
What’s The Solution for Repaying Student Debt?
On today’s podcast I review the numbers, and discuss how student loan debt impacts society, and I give seven practical tips for dealing with student loan debt. Those tips are:
Consider the end game. Ask yourself what type of job you can get when you graduate, and whether or not you will earn enough to repay your student loan.
Research and apply for all possible scholarships and other assistance that’s available. A grant or scholarship is better than a loan, since they generally don’t need to be repaid.
Beware of “front loading”. Many students qualify for scholarships or other aid in their first year based on their high school marks, but then not qualify in future years.
Don’t borrow any more than you expect to make your first year out of college.
Assess your chances at finishing the program on time, since your future earning power is directly tied to whether or not you graduate.
Education is not something you go to school for, and then it stops. The world changes fast, so what you learn in college may be out of date very soon after you graduate. Be prepared to keep learning. Focus on continuing to improve your skills.
Be sure you fully understand what happens if you don’t pay your student loans.
I’m recording this edition of Debt Free in 30 in September 2017, just as the new school year is getting under way, and today I want to ask a simple question, with a complicated answer:
Is your student debt sustainable?
In the first half of today’s podcast, I’ll look at some numbers that show how big student debt is in Canada. In part two I’ll move on to some recommendations about how to deal with the problem – both as individuals and as a society.
The Canadian Federation of Students published a report in April titled The Political Economy of Student Debt in Canada, and they quote some scary numbers:
The average student debt for a four-year program is $26,300
Tuition fee revenue to post-secondary institutions has tripled since 2001.
Total interest paid by a borrower to the Canada Student Loans Program in financing $30,000 of student debt over 10 years (2017): $10,318.87
So if you complete a 4 year program, the average student ends up with almost $30,000 in student loan debt, and if that loan remains outstanding for the next ten years, you could end up paying over $10,000 in interest on that loan.
Statistics Canada published a study in 2015 that said that the median income, 3 years after graduation, of:
College students was $41,600 and
Of university graduates with a bachelor’s degree was $53,000
So if you complete a four year program, 3 years later you might earn, on average, $53,000, but you will have, on average, $26,300 in student loan debt, which is about half of your salary after three years.
These are of course average numbers; some people will earn more, some less, but those are still staggering numbers.
Let’s assume that on your $53,000 salary you have to pay 25% in income taxes, so that leaves you with say $40,000 in net income, or $3,333 per month.
Let’s say you can find a really inexpensive place to live, and your transportation costs are low, so perhaps you have $500 per month for student loan payments.
On your $26,300 student loan, with interest, that’s still around 5 years to pay it off, and that assumes you never lose your job, or get sick, or have any unusual expenses.
That’s a lot of money.
The high cost of student debt has many social implications.
If you have to live in a tiny apartment to save money to pay off your student loan, and if you’ll be paying your student loan for many years, what are the chances that you’ll be getting married and starting a family anytime soon? Or buying a house, or even a new car?
And of course, there is the obvious result of high debt: bankruptcy.
As regular listeners to this podcast know, you can’t graduate from school one day and go bankrupt the next day to get rid of your student loans.
In Canada, we have a seven-year rule.
A government guaranteed student loan will only be automatically discharged in a bankruptcy if you have “ceased to be a student” for at least seven years before you file your bankruptcy or consumer proposal. It’s not seven years from when you got the loan; the seven-year clock only starts ticking when you cease to be a student, which generally means the end of the last term you were a student, or when you graduated.
While I’m sure many former students would like to file a consumer proposal or bankruptcy to deal with their student loan debt, they can’t, unless they are willing to wait seven years for the automatic discharge rule to kick in.
But here’s the scary part: even with this seven-year rule, 15% of people who file a bankruptcy or a consumer proposal have a student loan at the time they file, and that’s up from 13% two years ago, so the situation is getting worse.
We compile these stats in our Joe Debtor study. That’s how I know that for our clients that have student loans, they still owe almost $14,000 in unpaid student loans at the time they filed for insolvency. And again, remember that if student loans are the big problem, you’ve got to wait seven years before you can get bankruptcy protection. My clients have been attempting to make payments on their student loans for seven years or more before they go bankrupt. Many have already paid back thousands of dollars in student loans and interest.
So why do people go bankrupt?
Because they have no other choice.
But, you say: student loans generally have interest rates that are a lot lower than credit card interest rates,
the government has repayment assistance plans,
graduates got an education to earn a higher income
True enough but for many, this isn’t enough.
You can’t apply for a repayment assistance plan until you have been out of school for at least six months, and to be eligible, your loans must be up to date.
These repayment assistance plans may reduce your payments, but it’s also possible that even with the reduction in payments your repayment plan can last for up to 15 years after leaving school.
Unfortunately, repayment assistance plans are not a solution for many people. A lot can happen in 15 years. You can lose your job or get sick. Deferring payments doesn’t help get rid of debt, it just punts the potential problem down the road.
That’s all bad news, but I haven’t told you the worst part:
Student loans debtors are much more likely to be women.
Women owe more in student debt, are more likely to have a dependent, are more likely to be a single parent, and are more likely to be unemployed at least part of the time.
Here are the numbers:
62% of student debtors are women
55% with dependent (34% males)
35% lone parent (4% males)
$14,328 student debt ($13,071 males)
Student loans are a big problem for both men and women, but why are they an even bigger problem for women?
One reason is that, as the numbers show, women are more likely to have a dependent, or be a single parent, so they have added financial pressures that make student loan repayment more difficult.
Most of our clients are working at the time they file; 88% of males are working, and 80% of females are working, but that slight disadvantage for women, again, makes it harder to deal with their student debt.
I don’t have detailed statistics to prove it, but I suspect that having responsibilities for a dependent also has an impact on employment for women.
Of all our clients, 17% are the head of a single parent household, with an average of two dependents.
For female student debtors this ratio was 35%. In other words, just over one third of women filing insolvency with student loans were single parents.
Single parents have household income below that of the average debtor, and that makes it more difficult for the single parent to support two dependents plus herself. Add student debt repayment on top of that burden and again, it is often the first payment to be pushed aside when prioritizing monthly expenses.
It is true that female debtors have less debt than the average for all of our clients, but with a lower and unstable income that makes it more difficult to service their debts.
Our average female client with student loan debt has only $282 available each month for debt repayment, so you can see why it’s very difficult to service over $14,000 in student debt, and all other debts, on that small amount of cash flow.
Based on these numbers, the answer for many former students to the original question: is your student debt sustainable, is “no”.
Those are the numbers, but this is not a story about math; it’s a story about people.
It’s obvious that there are an increasing number of students who get increasingly large student loans, and have great difficulty paying them off.
Our average client with student loan debt is 35 years old. That means they have been trying to pay back their student loans for a long time, and they just can’t manage it.
Their student loans lead to other debts, which leads to even more debt, and finally a consumer proposal or a bankruptcy is their only option.
So what’s the solution?
For starters, I have long been a proponent of shortening the seven-year rule to something more reasonable.
In 2008, when Parliament was considering changes to bankruptcy legislation, Ted Michalos and I travelled to Ottawa and testified before the Senate Standing Committee on Banking, Trade and Commerce.
At that hearing, almost 10 years ago, I told the senators that our typical student loan debtor was a female, aged 37, with over $8,000 in student loan debt.
Well, here we are, in 2017, and our typical student loan debtor is still a female in her mid-30s, but instead of owing $8,000 in student loans, she now owes over $14,000.
Obviously, the situation has gotten much worse in 10 years.
I’ll post a clip from YouTube of my testimony in the show notes.
At that hearing, I proposed that the student loan discharge period, which at the time was 10 years, be shortened to two years. The government did amend it from 10 years down to 7 years, but I didn’t think that was enough.
That was ten years ago.
Three years ago, in the summer of 2014, the government again reviewed bankruptcy legislation, and we again proposed a shorter student loan discharge period.
Since we knew, based on the results from our past testimony, that the government wouldn’t go for a shorter period like 2 years or 5 years, , this time we suggested the waiting period be for as long as the program of study, with a maximum period of 5 years.
So, if you took a four-year degree program, your waiting period would be 4 years. A one-year program at a vocational school would have a one year waiting period.
The government ignored our suggestion.
So what do I think today?
I think you can make the argument that student loans should be treated exactly the same way we treat credit card debts, or income taxes: if you meet the requirements to file bankruptcy, your debts should be discharged.
However, I understand the counter-argument.
The knowledge you gain from an education is with you for the rest of your life, so it’s not fair that you just go bankrupt and eliminate your student loans.
Okay, I don’t fully agree with that argument, but fine, make it a two-year rule then, so that we don’t have a wave of new doctors going bankrupt the day they graduate. I’ll suggest that to the government the next time they consider changes to bankruptcy legislation, which is currently scheduled for 2018.
But all of this talk about changing the bankruptcy rules is missing the point.
We are talking about treating the symptom, not the real problem.
The problem is that if, after you finish school, you can’t get a job that pays you enough to pay off your student loans, that means it costs too much to go to school!
Perhaps that’s the problem: school costs too much.
I’ll admit I’m an old guy. I graduated from university 30 years ago, in 1987. In my day, tuition only cost around $1,000 for a full school year.
Now I realize there has been inflation since then, but when I go to the Bank of Canada inflation calculator I find that $1,000 in 1987 is about $1,900 in today’s money.
I’m a Commerce and Economics graduate of the University of Toronto, so I went to their website and discovered that the first year tuition for a Commerce student is $6,400.
I also discovered that the tuition for years 2, 3 and 4 is over $16,000!
If you take one of the very difficult programs, like engineering, the first year tuition is over $14,000!
So how is it possible that I paid $1,900 in tuition for my last year of university 30 years ago, adjusted to today’s dollars, and if I was doing the same program today it would cost $16,000?
I’m no “rocket surgeon”, but it sure sounds like university is more expensive, and I doubt they are spending that much more on the students. I don’t think the professors are getting rich either, so I assume that administrative costs and overheads are the reason for the much higher cost.
How can universities afford to spend so much more on overheads?
Student loans!
The government guarantees student loans, so the universities don’t care if their students get a good education and can pay back their loans; it’s not their worry.
When Ford Credit loans you money to buy a car, they want to make sure you can pay it back, or they may lose money. That’s not the university’s worry, because it’s not their money. If you don’t pay it back, they don’t lose anything.
So is the answer for the government to stop guaranteeing student loans?
That would certainly reduce the cost of education, because virtually no-one would be able to afford to pay the high fees without a student loan, but that would probably also mean that a lot of deserving students could not go to school.
Perhaps the answer is to penalize the universities if their students default on their loans. That may encourage the universities to charge reasonable fees, and to do their best to ensure that they are offering worthwhile programs that will make their students employable when they graduate.
This is a complicated issue, and I admit that I don’t know how to solve the problem for society.
So I won’t.
But here’s what I will do:
If I can’t make the government listen to my suggestions, let me instead give you some practical suggestions that will help you, or your kids, stay out of the student loan quagmire.
Here are my seven tips for you, or your kids going to college, to keep student loan debt manageable.
First, and most importantly, consider the end game. We get caught up in the emotion of graduating from high school, and we want to get started at college or university, so we think about what courses we will take, and where we will live. That’s great, but we should also spend time thinking about what we will do when we finish school.
Will there be jobs available in the area I’m studying? What do they pay? Will I have any chance of paying off my student loans when I graduate?
Yes, I realize the there is intrinsic value in learning how to think and in learning how to manage as an adult while in University. But if I’m going to graduate with $50,000 in student loans, and it’s unlikely I’ll find a job in my field that can repay that debt, I should re-think my plan.
Think about the end, not the beginning.
Over the years I’ve met with hundreds of people with student loan debt, and in a lot of cases they never thought about what type of job they would get when they graduated, and I think that’s a mistake.
That’s the big picture; here’s some more specific advice:
Advice for students and their parents:
Consider the end game.
Research and apply for all possible scholarships and other assistance that’s available.
The tuition may be $10,000 a year, but if you qualify for a $5,000 scholarship, that obviously reduces your costs.
A scholarship or grant is better than a loan.
Beware of “front loading”. Many students qualify for scholarships or other aid in their first year based on their high school marks. But it is very common for your marks to decrease in second year, so you may not be eligible for academic scholarships in second year. Universities know this, so they offer a good entrance scholarship to get you in the door. Be sure you understand the full cost, not just the cost of first year.
Don’t borrow any more than you expect to make your first year out of college.
This takes a lot of research, and at best it will only be a guess, but it’s a good benchmark. The more you expect to earn, the more you can reasonably repay, so there may be some justification for a higher student loan in a higher earning field.
Stick with schools that will allow you to stick to that rule.
Assess your chances at finishing the program on time, since your future earning power is directly tied to whether or not you graduate. You are at a higher risk of defaulting on a student loan if you:
Switch programs part way through, and have to start over, or
Switch colleges, or
Take longer than four years to complete a four-year degree
People with $5,000 in debt are often at greater risk than people with $50,000 in debt, because they are the people who didn’t complete their education, so they didn’t incur a lot of debt, but they also didn’t get the degree to allow them to earn more income.
Education is not something you go to school for, and then it stops. The world changes fast, so what you learn in college may be out of date very soon after you graduate. Be prepared to keep learning. Focus on continuing to improve your skills.
Final point: be sure you fully understand what happens if you don’t pay your student loans.
This final point is important. As I said earlier, you can’t just go bankrupt when you graduate and eliminate your student loans. You are stuck with your student loans for a long time, and the government has the power to seize your tax refunds if you aren’t paying, so be sure you understand the implications.
If you are a parent, and you are co-signing a loan for your child, you are taking a risk, so again, be aware of the risks.
If you are listening to this show and you have already finished school, and you are struggling with your student loans, reach out for help.
Even if your student loans are not seven years old, you may have options.
My firm, Hoyes Michalos, has done thousands of consumer proposals and bankruptcies for people over the years with student loans, and in many cases dealing with all your other debts, like credit cards and bank loans, gives you the relief you need so you can manage your student loans. So, even if your student loans won’t go away, there may be solutions.
I started the show by asking a simple question:
Is your student debt sustainable?
For many of our clients, the answer is “no”. It’s impossible to pay back.
What’s the solution?
As a society we need to take a hard look at what we are getting for the money we spend on education. Perhaps it’s not wise for governments to provide encouragement for everyone to get a four year degree by guaranteeing student loans.
I’ve tried, but I haven’t been able to convince the government to change the seven year student loan rule, so that means it’s up to you to take care of yourself.
This is a topic we will address many more times in the future, but for now, be sure you understand the rules, and make sure you pay attention to what will happen when you finish school, not just what happens at the start.
And finally, remember that you, or your child, are an individual. You have to do what’s right for you.
If you want to be a doctor, you need to go to university.
But if you aren’t sure what you want to do, perhaps a better plan is to work for a year, or take some courses part-time, until you have a better idea of where your interests lie. That way you gain some work experience, some time to consider your options, and you delay or perhaps avoid taking on excessive student debt.
That’s our show for today.
I’ll put full links to everything we discussed today in the show notes over at hoyes.com, that’s hoyes.com that’s h-o-y-e-s-dot-com, and a full transcript is also available.
Our website also has full contact information if you want to discuss your student loan options.
Thanks for listening. Until next week, I’m Doug Hoyes, that was Debt Free in 30.
A few years ago a student came into Hoyes Michalos who was very stressed about his financial situation and level of student debt. He explained that receiving his OSAP was the first time he ever had so much “money” in his life. That was the first sign that he jumped in head first.
Money and debt. These two words tend to be used interchangeably and yet they are so different.
Lesson #1 – Call it what it is – Student Debt
Your student loan is debt – not money. It was Mark Twain who wrote: “But language is a treacherous thing….” Phrases and words can become commonplace and be used without conscientious thought. But what we say openly and tell ourselves internally can influence our beliefs and behaviours.
Each time you spend your student loan, know that you aren’t using your money, you’re taking on more debt. That debt will need to be repaid and with interest shortly after you leave school. Having this clarity may help you to be more mindful about your spending habits.
It is far easier to get into debt than it is to get out of debt. This seems straight forward, but the wires clearly aren’t connecting as Canadians continue to take on more and more debt.
Lesson #2 – Student Credit Cards 101
Expect to be approached by credit card companies during this phase of your life. Establishing a credit rating is a good thing, but understand how these cards work. Also ask yourself if you can live without a credit card. They can be extremely expensive if you don’t pay off the full balance each month. Minimize your post-secondary debt load as best you can. To help balance your debt to income ratio, apply for grants and scholarships, work between semesters or even throughout the year if possible.
Lesson #3 – If your name is attached to a bill, you are responsible for it.
At some point, you may decide to rent a house with some roommates off-campus. Be cautious not to put all the bills in your name. Your creditors won’t care if your roommates were supposed to split the bill. They can only pursue the person/persons with their name on the bill. Consider dividing up bill responsibility as equally as you can i.e. one person takes on hydro, someone else heat etc. Each roommate should take on some risk. When you move out, whether it’s on your own, or the whole house moves, make sure to remove your name from the bill.
Lesson #4 – Understand the repayment terms of your student loan.
How much will you need to pay back each month and at what interest rate? Your lender may give you the option to choose a fixed or variable rate. Fixed means the interest rate does not change, but your lender will build in a safety cushion for themselves. A variable rate will fluctuate with the market and this means that your payment will also. By understanding your terms and repayment schedule in advance, you can avoid any unpleasant surprises.
It takes the average post-secondary student more than 10 years to repay their student debt in full. After years of struggling, you may no longer be able to keep up with your student loan payments. Here are 4 debt relief options to consider. Voluntary renegotiation – contact your student loan lender and negotiate new payments terms you can afford. This is a good option if: you can afford to repay your loans in full and you only need temporary payment relief. Canada Repayment Assistance Plan – this applies only to government guaranteed student loans. Monthly payments may be reduced or eliminated based on income. You must: reside in Canada, be out of school for at least six months, cannot be in default on your student loans. Graduates can obtain full relief from payments while their income is below set income thresholds. This option will not eliminate your student debt. It provides payment relief, not debt relief. Consider bankruptcy. Government guaranteed student debt is eligible for discharge under the Bankruptcy & Insolvency Act if you have been out of school for more than 7 years. The 7-year clock starts from the date you ceased to be a student. This can be shortened to 5 years if you can prove financial hardship. Bankruptcy will also eliminate credit card and other unsecured debts. File consumer proposal. As an alternative to bankruptcy, a consumer proposal will also discharge student debt over 7 years old. Student debt less than 7 years old? Bankruptcy or a proposal may still be a good option…Eliminating other debts can improve your cash flow making student loan repayment easier. Talk with a Licensed Insolvency Trustee. An LIT is qualified to provide you with a range of options to deal with your student debts.
Lesson #5 – Learn how to budget your student expenses now.
This is a life skill that you will carry with you for the rest of your life. Knowing how to budget will give you freedom, oversight and can save you thousands of dollars. There are some terrific tools available including our budget workbook. You can go to a not-for-profit credit counselling organization and meet with a budgeting specialist.
Post-secondary education is the time in your life where you learn to grow. You’re not only expanding your knowledge base, but you’re also increasing your real-life experiences. Enjoy those experiences, but make sure to mitigate your risk when it comes to debt.
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